Real eState

Prize-winning real-estate economist says the office market won’t improve for years: ‘This is a trainwreck in slow motion’

Published

1 year ago

October 11, 2023

One of the most seismic changes from the pandemic is where we work. For many of us, that’s still completely or partially at home, leaving a major glut of office space where millions of Americans used to spend 40-plus hours per week.

The appetite for offices is so low that there may be as much as 1 billion square feet of unused U.S. office space by the end of the decade, according to a report early this year by real estate firm Cushman & Wakefield. That’s nearly 1.5 times the amount of office vacancies at the end of 2019, just before the pandemic began.

It only took a couple of years for the office real estate market to hit a decades-low vacancy rate, but it could take much longer for it to rebound. The office vacancy rate is nearly 20%, according to CBRE, and market experts have little confidence it will improve soon.

“It could easily take several years for the office market to stabilize, which is why I’ve referred to all this as a trainwreck in slow motion,” Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia Business School, told Goldman Sachs in its Commercial Real Estate Risks report released Monday. Van Nieuwerburgh is a highly regarded European economist who won the Bérnácer Prize, awarded to European economists under the age of 40 who make “outstanding contributions” to macroeconomics and finance research.

He predicts impending doom for four reasons, the first being that it’s still unclear whether some leases from before the pandemic will be renewed. Because office leases have an average length of seven years, it will take several more years for all pre-pandemic leases to roll off, he explains.

“Many tenants have not made active space decisions yet and are waiting for their leases to expire to either reduce space or negotiate a better deal,” he said. “Both are bad news for landlord cash flows for years to come.”

Secondly, as vacancies continue to rise, rents will likely fall. Office vacancies are at a 30-year high, Julie Whelan, CBRE’s global head of occupier research, previously told Fortune. Although there has been “surprisingly little” lowering of office rents, Van Nieuwerburgh expects “downward pressure on market rents to increase in the near future.”

Another contributor to impending doom is landlords having to refinance mortgage loans. Typically, landlords take out 10-year mortgages that they then refinance at the end of the loan term. With mortgage rates at multi-decade highs, landlords are now feeling a lot more financial pain when they refinance.

“Interest rates have more than doubled, there are cash flow problems because of vacancy, and building values have fallen because of hybrid work and higher interest rates,” Van Nieuwerburgh said. “All of this means that lenders will not be willing to roll over the debt.”

Lastly, city tax assessments are completed infrequently, which could place a lag on helping determine commercial property values, Van Nieuwerburgh explained. For example, instead of determining commercial property values on recent comparable sales, New York City sets the value based on five years of most recent income and expenses, according to the city’s Department of Finance.

in short, turning around the office market would require a return to the corporate norm of cubicles and commutes. And that will only happen if and when companies determine that the current post-pandemic reality is bad for worker productivity.

“It would take a near consensus that hybrid and remote policies are resulting in uniformly negative outcomes for companies,” Van Nieuwerburgh said.

While the outlook for office space is overall gloomy, more commercial real estate investors are considering and investing in converting their buildings into other uses—particularly office-to-residential projects. Reusing office space for multifamily units could help to ease the undersupply of an estimated 2 million to six million housing units, according to Morgan Stanley.

While there are more than 200 office-to-residential projects underway in the U.S., according to a study released by Deloitte in July, there’s much more that could be done.

“If you look at what has been converted since 2016 and what is even planned to be converted through 2025, that’s only 90 million square feet,” Whelan previously told Fortune. “So when I say that the conversions that have happened and that are underway are really only a drop in the bucket with the vacancy that’s out there, that’s what I mean.”

Van Nieuwerburgh, however, says there’s a limit to conversions because only about 10% of office buildings in downtown areas with “substantial vacancy” may be viable for such projects. This expands even beyond residential usage to include mixed-use space, medical offices, student dorms, child care, and even pickleball courts.

“Not all conversion projects make economic sense,” he warned.

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Real eState

Greater Toronto home sales jump in October after Bank of Canada rate cuts: board

Published

4 days ago

November 6, 2024

Anne Joseph

TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.

The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.

The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.

“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.

“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”

The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.

New listings last month totalled 15,328, up 4.3 per cent from a year earlier.

In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.

The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.

“I thought they’d be up for sure, but not necessarily that much,” said Forbes.

“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”

He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.

“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.

“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”

All property types saw more sales in October compared with a year ago throughout the GTA.

Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.

“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.

“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”

This report by The Canadian Press was first published Nov. 6, 2024.

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Real eState

Homelessness: Tiny home village to open next week in Halifax suburb

Published

2 weeks ago

October 24, 2024

Anne Joseph

HALIFAX – A village of tiny homes is set to open next month in a Halifax suburb, the latest project by the provincial government to address homelessness.

Located in Lower Sackville, N.S., the tiny home community will house up to 34 people when the first 26 units open Nov. 4.

Another 35 people are scheduled to move in when construction on another 29 units should be complete in December, under a partnership between the province, the Halifax Regional Municipality, United Way Halifax, The Shaw Group and Dexter Construction.

The province invested $9.4 million to build the village and will contribute $935,000 annually for operating costs.

Residents have been chosen from a list of people experiencing homelessness maintained by the Affordable Housing Association of Nova Scotia.

They will pay rent that is tied to their income for a unit that is fully furnished with a private bathroom, shower and a kitchen equipped with a cooktop, small fridge and microwave.

The Atlantic Community Shelters Society will also provide support to residents, ranging from counselling and mental health supports to employment and educational services.

This report by The Canadian Press was first published Oct. 24, 2024.

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Real eState

Here are some facts about British Columbia’s housing market

Published

3 weeks ago

October 17, 2024

Anne Joseph

Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

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